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Thursday, 26 January 2017

Post Truth Taxes and Alternative Charges

Post Truth Taxes and Alternative Charges

Long Term Care Charge – or Tax?

In December 2013, the States debated the Long Term Care Charge, and part of the debate centred on whether it should be considered a tax, essentially sneakily pushing the base rate of income tax up from 20% to 21%, or a “charge”. The line taken by the Treasury Minister, Senator Philip Ozouf, the Social Security Minister Francis Les Gresley, and the Chief Minister Ian Gorst, as well as other supporters, was that it was a “charge” or “contribution”, and did not therefore break the promise that “no new taxes would be introduced”.

Deputy John Young noted that its linkage of every contribution to the income tax system meant it would be seen as a tax – “it has all the ingredients of introducing a new tax, and for taxpayers and everybody in the Island it will be seen as a tax and has all the negative potential consequences of adverse economic effects which was mentioned by the Fiscal Policy Panel.”

He noted that: “Just one example, pensioners have no such allowances and will almost certainly pay the full rate so we have a system where the standard rate taxpayers will pay the full L.T.C. charge which is the 5 per cent on what they pay, which is effectively 1 per cent of their gross income which means they will be paying tax effectively at 21 per cent and, over the lifetime of this scheme, it will rise to around 24 per cent.”

Montfort Tadier was also not convinced: “I am going to argue that it is, essentially, a tax and other Members might do that again. It has already been mentioned already. “It may be clichéd but we are told that if something looks like a duck, walks like a duck, perhaps swims like a duck and maybe even goes: “Quack quack”, it probably is a duck. So when is a tax not a tax? I would suggest this certainly looks like a tax and it acts like a tax. Certainly for those who are earning under £152,000 a year, it is a tax. It is essentially a 1 per cent tax or thereabouts for them and their disposable income will go down by that amount.”

“If contributions are to be levied on earned and unearned income, will the Minister for Social Security confirm that the effect will be that the Island’s headline income tax rate will go up from 20 per cent to 21 per cent?”

And Senator Sarah Ferguson also agreed:

“Very quickly, we are continually told that this is a charge, not a tax, in which case it says, and as the Minister for Social Security has said, in the report that we are basing it on income tax liabilities. But if it is not a tax, why are we basing it on the liabilities and not the gross which is, I think, Deputy Young’s point? We do have to think carefully because we are adding another charge, it may not be allegedly a tax, on to the ordinary man in the street.”

Deputy Andrew Green argued against this notion: “Okay, this is slightly different, and we have picked up on the income tax to collect it, but it is not a tax”

But Deputy Geoff Southern was not convinced:

“Unlike previous speakers, I think the debate on tax or charge or insurance is completely relevant to this because we have a Minister for Treasury and Resources committed to saying, repeating, promising, and assuring us no new taxes. If we call this a tax he individually is in trouble. Is it tax or is it a charge?...By all means, support this plan if you like but do not go round saying: “No new taxes. We are keeping taxes down”, because call it a tax or a charge, it is going to go up. Why do we not admit it?”

“Liability for the LTC contribution will be calculated in the same way as income tax liability is calculated, based on taxable income, and taking into account income tax deductions, allowances and marginal relief.”

However, the Minister for Social Security, Francis Le Gresley, was bullish in saying that it was not a tax:

“The close link with income tax calculations allows the existing income tax collection system to be easily adapted to collect long-term care contributions alongside income tax liability. However, the long-term care contribution - and I stress “contribution” and not “tax” - is a contribution under the Social Security Law.”

And Deputy Eddie Noel, Assistant Minister at the Treasury, concurred:

“The scheme will be funded by a new charge rather than a tax. On balance it is more like a charge than a tax because the money raised will be going into a special ring-fenced fund. It cannot be used for anything else other than for long-term care. We do not hypothecate general taxation in this way.“

“It is like a charge because the contributions are going into a ring-fence fund designed to provide a specific range of benefits. It is a charge because the contributions are capped at the same level as the current Social Security contributions.”

The Jersey Finance Fiscal Strategy Group was not convinced. Their “main concern was that the new charge for long-term care would be perceived as a tax increase. It explained that the current 20% tax rate was Jersey’s ultimate selling point and even though contributions were to be collected by the tax department, any perception of an increase may detract investors and skilled professionals considering relocating to Jersey. “

And the Institute of Directors concurred that “that the proposed charge for long-term care will be perceived as a tax.”

But Francis Le Gresley stuck to his guns:

“Although collected through the same mechanism as Income Tax, the LTC contribution rate is not an increase in general taxation”

Proposed Health Charge or Tax?
When the proposed Health Care Charge was introduced – to run along the same lines as the LTC, the Minister Andrew Green was determined that it too was a charge, and not a tax. He even appeared on BBC Radio Jersey to say as much.

Geoff Southern asked:

“Will the Minister explain what link, if any, there will be between liability for the proposed ‘health charge’ and usage of the services it will fund and, if there is no discernible link, will he commit to referring henceforth to the ‘charge’ as a ‘tax’?

But Senator Green, who had checked with Senator Maclean and his officials at the Treasury, had this reply:

“This hypothecation of the monies raised through the health charge is one of the primary reasons why the Treasury has determined that the measure should be described as a charge.”

“From a Treasury perspective, ...fund, the health charge is more akin to those contributions rather than a tax measures”

“The Treasury’s decision is further supported by the existence of the cap on the income that is taken into account for the purposes of calculating an individual’s liability under the health charge.”

Scrutiny was not convinced:

“The Panel’s adviser explains that although the health charge is being described as a “charge” it is in effect a tax: “Given that there is no discernible linkage between usage and liability, the term “charge” is inaccurate as it is in effect a Tax (perhaps no different from the Long-Term Care Contribution). Essentially it appears to be a hypothecated tax yet the Health Account does not directly benefit from the resultant income e.g. appearing within the revenue account for Health. We are advised that the “charge” is routed through the Consolidation Fund with the Health Account getting the additionality through growth”

“The Panel also concurs with the adviser’s view that the health charge is in effect a tax. The Panel wishes that this MTFP would demonstrate a more honest and realistic approach to the necessity of public funding.”

Senator Green stuck to his guns. This was hypothecated – in layman’s terms – ring fenced, and it had a cap. It was exactly like the Long Term Care Charge. It was a Charge, not a Tax.

In the end, the proposition failed to be passed.

Post Truth Taxes and Alternative Charges
In order to calculate that the taxes needed for a bond to be raised for the new hospital were within limits, the Treasury did some neat juggling of figures. Andrew Maclean concluded that, if the Long Term Care Charge was included within general taxation, this should make the limit required by law.

This was queried by Deputy Tracy Valois, who argued that the Long Term Care Charge could not be added on, because it was a charge, and not a tax. That, after all, was what everyone in the Council of Ministers past and present had been saying all along.

However, advice was asked of the Solicitor General, who looked at general UK case law, and completely ignored the statements that had been made by all the politicians to this point. He concluded that “I view the long-term care contributions as a hypothecated tax” and noted that “a hypothecated tax is still a tax.” I’ve posted the complete statement below.

So now we have an “alternative fact”, that the charge which everyone in the government said was most definitely a charge and not a tax, is in fact not a charge after all, but a tax.

It says something for the short-term memory of this Council of Ministers that they can turn around 180 degrees when it suits them to do so, and not show the slightest shame or apologise for all those misleading statements.

The present government seems to lurch from one shambles to another, and presumably were they to bring back the “health charge”, it would really be a "health tax" according to the best legal advice. It is unlikely however that Senators Alan Maclean and Andrew Green will confess to misleading the States.

One thing is certain, any “charge” in future will face a very strong legal bar to be considered as a charge and not a tax,. For most tax payers, the rate of tax is now that which is the default if you have no ITIS rate given by the Taxes Office, i.e., 21%. For the benefit of the outside world, we may play at saying that it is still 20%, because that instils confidence. But at the heart of that statement lies a black deceit.

The Solicitor General’s Statement in Full
I have considered the matter overnight and I have reviewed the Public Finances Law and the Long-Term Care Law. I have also had regards to English case law concerning tax and contributions.

Those are obviously not Jersey cases but in my respectful view they would be highly persuasive to the Royal Court in considering this issue.

So in terms of how legally a tax is viewed and defined, in law there is a distinction between charges levied by a state which are contributions and those which are taxes.

So the classic example of a contribution is social security whereas the latter taxes comprise all compulsory charges and taxes. So the distinction between a tax and a contribution is a contribution is, essentially, one of personal entitlement arising by virtue of having made contributions and being calculated with respect to the amount of the contributions. So a classic example is National Insurance, or social security contributions which in English law are not taxes.

There is a case in England concerning Goldman Sachs where it was held that social security contributions are not taxes whereas a tax is one where a person is required by virtue of having done something or because the State’s permission is required to do something simply because the person exists.

A tax is, it might be said, to be something which the citizen does not really get any rights in return whereas a contribution is something where the payer accrues an entitlement. It does not need to be the case that a person who pays the contribution necessarily becomes entitled in due course. Other factors may affect that entitlement such as where the individual lives in the future but the causal link between the contribution and the entitlement must have some degree of reality.

So here indirect taxes such as the impôt, stamp duty, land transaction taxes are taxes for the purposes of Article 21 of the Public Finances Law. So in my submission, that is made clear by the definition of taxes and taxation in Article 1 of the law. So tax includes a duty and taxation shall be interpreted accordingly. That is the definition of taxation in the law.

Rates are also taxes because the legislation imposes an obligation to pay rates by virtue of land ownership or occupation.

However, social security contributions are not taxation. So they are not included for the purposes of Article 21. However, taxes that are levied for specific purposes are taxation notwithstanding there may be legal limits on their use. All tax is levied for a purpose or a range of purposes but a particular tax is legally directed towards a single public purpose, so-called hypothecated taxes, does not make it any less the use of State power to levy taxation.

The fact that it is a hypothecated tax still means it is taxation. So a person who makes no contributions will still be able to benefit from long-term care in this case, whereas a person who makes large contributions to long-term care will not receive any additional entitlement under the Long-Term Care Law to benefits.

In this case, the long-term care fund is not separate from the States. It is not a fund like P.E.C.R.S. (Public Employees Contributory Retirement Scheme) or the Teachers’ Superannuation Fund which are separate funds from the States.

The Long-Term Care Fund is a fund that is managed by the Minister for Treasury and Resources that is set aside to pay a particular purpose. So ultimately it is a means by which the States will be able to meet expenses currently met by tax going into the Consolidated Fund. If the States were to stop paying someone out of tax paid to the Consolidated Fund but it allocated tax into a tax into a ring-fenced fund, has the States lost income? No, it is still meeting public purposes through taxation.

I repeat, a hypothecated tax is still a tax and the expenditure it meets is still public expenditure. It changes nothing but appearances that the tax is being accumulated to meet future expenses, long-term care costs in this case.

So for the purposes of Article 21(3) in my opinion in legal terms I view the long-term care contributions as a hypothecated tax and I do see it as income of the States for the purposes of the limit that is in Article 21(3) of the Law. That is my advice.

1 comment:

One sideline on this: if the States persist in the argument that LTCL is not a tax, this surely means that it is not covered by the cap on taxation for what I still think of as 1.1.k residents ? So not only would these residents have to pay the charges on top of their income tax, but they would have to pay to the full extent of their liability.